In a couple of articles recently I have noted that Greece and Spain seem to be breaking the ranks of economic stagnation in Europe. While we wait for Eurostat to release third-quarter GDP data, let us take a look at what has happened on the job front in those two countries.
Let us, first of all, make one thing clear: a recovery as traditionally defined in the macroeconomics literature is not necessarily a recovery from a crisis of the kind Europe is now stuck in. This crisis is structural – permanent by default – and it will take a permanent change in the structure that perpetuates the crisis in order to end it. We may see an improvement in economic activity without such changes, but that improvement will not be strong enough to actually recover these economies.
A real recovery means a permanent elevation of economic activity above the two-percent growth threshold. Greece and Spain are far away from that threshold – even if they occasionally hit it in one quarter, it does not mean that they have recovered.
That said, there is one area where the Greek and Spanish economies are at least showing some resiliency: the job market. Analyzing Eurostat employment data we find quite a few interesting factoids.
Both Greece and Spain saw stronger job growth in Q2 2014 than the euro zone as a whole. In Greece the total number of employed persons grew by 1.58 percent over the previous quarter; in Spain the increase was 2.37 percent. For the 18-country euro area as a whole, job growth was a modest 1.21 percent.
In Q1 2014 total Greek employment increased by 0.11 percent, while Spain saw a 1.07-percent decline. Both numbers beat the euro zone where total employment fell by 1.57 percent over the previous quarter, Q4 2013.
Annually, the improvement is not quite as impressive. The Greek economy only grew total employment by 0.1 percent in Q2 2014 over Q2 2013. For Spain, the number was better at 1.1 percent, clearly beating the euro zone’s 0.3 percent. But both Greece and Spain lost jobs in the first quarter over same quarter previous year: employment was down 0.6 percent in Greece and 0.5 percent in Spain, while euro-zone employment expanded by 0.2 percent.
Nevertheless, looking back, the Greek economy has clearly been moving in the “right” direction for some time. Their annual quarter-over-quarter employment numbers have been improving for five quarters in a row now. This means four quarters of smaller and smaller decline, and again one quarter with an improvement year-to-year. The Spanish economy has seen a similar trend, though not quite as pronounced as in Greece.
The euro zone, by contrast, is not exhibiting any clear job-creation trend. Year to year, its quarterly employment numbers vary within a narrow band: from a decline of one percent to 0.4 percent growth. This verifies that the Greek and Spanish economies are bucking the trend, and this in turn calls for a deeper analysis of why that is happening. Furthermore, it means finding out whether or not it is realistic to expect the improvement trend to continue.
There is more good news for Greece and Spain: both countries have been able to turn around, or almost turn around, the employment situation for their young. In the age group 15-24, Greece has again seen five straight quarters of improving numbers: three quarters of a slowdown in job losses and two straight quarters, Q1 and Q1 2014, of actual growth in youth employment. For Spain, the trend is again not as pronounced – young Spaniards are still losing jobs – but at least situation is not worsening nearly as fast now as it did in 2012. For Q1 2014 Spanish youth employment fell by 4.7 percent; for Q2 2014 it fell by 1.2 percent. By contrast, the first two quarters of 2013 the decline was 14.7 and 12.4 percent, respectively.
In this area the euro zone is still very much in trouble. Consider these changes, quarterly year-over-year, to youth employment in the 18 euro-zone countries:
|Euro-18 youth employment change||-3.94%||-3.05%||-2.88%||-2.71%||-3.01%||-2.75%|
As soon as third-quarter GDP data is out we will take a close look at them. Then we will get a good opportunity to asks whether or not Greece and Spain are indeed recovering, or if their job improvement numbers are merely a reflection of the end of the harshest austerity measures known to free men (outside Sweden) since the 1930s.
European third-quarter GDP growth data is beginning to make its way out in the public. What we have seen so far is just more of the same new normal – the same new stagnated way of life in industrial poverty.
Starting from the aggregate level, Eurostat’s third-quarter growth report says that the EU-28 grew at 1.3 percent per year in Q3 of 2014 over the same quarter 2013. The euro zone’s growth rate was half-a-percentage point lower at 0.8. This difference is the same as over the past few years: the last quarter where the euro zone grew faster than the entire EU was in Q1 of 2011. It shows that austerity is still taking a tougher toll on Europe’s core countries than its non-euro members on the outer rim.
Or, to make the same argument from the other side: if you are a European welfare state, it pays to keep your own currency.
The growth numbers for the EU and the euro zone are poor in and by themselves. By not even coming close to two percent per year, Europe is not even able to reproduce its own standard of living. But even worse is the fact that the U.S. economy grew by more than two percent annually for the second quarter in a row: 2.3 percent in Q3 of 2014, compared to 2.6 percent in Q2 of 2014. This growth disparity is slowly becoming a self-reinforcing phenomenon: when global investors see that the U.S. economy is growing while the Europeans are standing still, they choose to reallocate their investments to the United States. That way investments and new jobs go to where investments and new jobs are already going.
But does not that mean that the U.S. economy will run into inflation problems that, in turn, will even out the differences between the United States and Europe? No, not necessarily. In fact, that is a very unlikely scenario. We are now rising to become the global leader in producing energy, with costs far below those of European countries. Right-to-work states offer a union-free manufacturing environment, something that, e.g., Volkswagen successfully took advantage of when they opened their new plant in Tennessee. The large US-only Passat they build there is a runaway sales success, $7,000 cheaper and selling ten times more (100K units per year) than its German-built predecessor.
Long-term, it looks like manufacturing is making its way back to the United States. This does not bode well for Europe, whose exporting manufacturing industry has, basically, been the only part of the economy that has not sunken into the three shades of gray that is industrial poverty. That European manufacturing is in trouble is well proven by the Eurostat report, according to which Germany has seen a decline in growth for two quarters in a row: now down to 1.2 percent on an annual basis.
Another supposedly big manufacturing economy, France, barely finished the third quarter with growth at all: 0.4 percent over Q3 of 2013. Austria’s growth is also dwindling, with 0.3 percent this quarter compared to 0.5 in Q2 and 0.9 in Q1.
The only real positive news is that the Greek economy showed annual growth for the second quarter in a row - at 1.4 percent this quarter - with growth numbers improving steadily for a year now. Spain also shows positive growth, 1.6 percent, with a similar upward long-term trend.
Neither the Greek nor the Spanish number is anything to write home about, but it looks like the two countries are slowly recovering from the bad austerity beating they took in 2012 and 2013. It is an extremely hard journey back for both of them, though, especially for Greece which lost one quarter of its economy to destructive austerity policies. The welfare states of both Spain and Greece have now been recalibrated, so that government budgets paying for the welfare states will balance at a much lower employment level than before. This means, effectively, that government will begin to net-tax the economy and thereby cool off a growth trend long before full employment is restored.
This structural problem is entirely unknown to Europe’s lawmakers – and, frankly, to almost every economist on the planet. I defined the problem in my book Industrial Poverty; if unsolved, this problem will guarantee permanent economic stagnation in Europe for, well, ever.
That said, I don’t want to spoil the fun for Greek and Spanish families who are now seeing the first glimpse of daylight after a long, horrible nightmare. Let them celebrate today; tomorrow they will still be living in industrial poverty.
Retail trade is one of the better indicators of how an economy is doing. It is an immediate “gauge” of both confidence and private finances of consumers. Therefore, given the overall stagnant nature of the European economy, the latest report on retail trade from Eurostat has some valuable information in it:
The 1.3% decrease in the volume of retail trade in the euro area in September 2014, compared with August 2014, is due to falls of 2.2% for the non-food sector and 0.1% for “Food, drinks and tobacco”, while automotive fuel rose by 0.9%. In the EU28, the 1.2% decrease in retail trade is due to a fall of 2.1% for the non-food sector, while “Food, drinks and tobacco” remained stable and automotive fuel increased by 0.4%. The highest increases in total retail trade were registered in Malta (+1.0%), Luxembourg (+0.9%), Hungary and Slovakia (both +0.7%), and the largest decreases in Germany (-3.2%), Portugal (-2.5%) and Poland (-2.4%).
Month-to-month changes are not that important. The one detail here to note, though, is the big contraction in Germany. It is a small but noteworthy sign that the German economy, as this blog has reported before, is leaving a period of exports-driven growth and returning to the new European normal, namely stagnation.
The Eurostat memo also reported annual data:
The 0.6% increase in the volume of retail trade in the euro area in September 2014, compared with September 2013, is due to rises of 0.9% for “Food, drinks and tobacco”, of 0.6% for the non-food sector and of 0.5% for automotive fuel. In the EU28, the 1.0% increase in retail trade is due to rises of 1.5% for the non-food sector and 1.2% for “Food, drinks and tobacco”, while automotive fuel fell by 0.2%. The highest increases in total retail trade were observed in Luxembourg (+12.3%), Estonia (+9.1%) and Bulgaria (+5.6%), while decreases were recorded in Finland (-3.2%), Poland (-1.8%), Denmark and Germany (both -0.8%).
Again Germany shows up on the negative side, reinforcing the impression that the largest economy in Europe is no longer its locomotive.
On the upside, there is one interesting detail worth noting. Greece has experienced three months in a row of annual, inflation-adjusted retail sales increases: four percent in June, 4.6 percent in July and 7.4 percent in August.
Is this an early sign that the Greek depression is coming to an end? Let’s hope so.
Back in college I had a friend who blamed a cut in Swedish government-provided student loans on Moammar Ghadaffi. It was a tongue-in-cheek exercise, of course, designed to prove that if you want to, you can make any argument credible so long as you can make people believe your chain of cause and effect.
For some reason, that idea is widespread in politics, only there it is taken with the utmost seriousness. Political leaders can make the most remarkable connections between otherwise totally unrelated events. This is particularly true in economics and policy. The latest example is the stubborn European recession and what it is blamed on. Reports the EU Observer:
The European Commission lowered its growth forecasts for the EU and the eurozone area, blaming the wars in Ukraine and the Middle East, and urging governments to do more to spur investments. According to the Autumn forecast growth in the EU is now expected to be 1.3 percent of GDP this year, compared to 1.6 percent projected in spring, while the eurozone economy is to grow by only 0.8 percent, compared to the earlier projection of 1.2 percent.
I have lost count of how many times that European forecasters have had to adjust their forecasts downward. Not to brag (actually, yes, to brag…) I have not changed my forecast at all since I formulated Europe’s current problem more than two years ago. That problem is a structurally unaffordable welfare state combined with policies that try to preserve the welfare state inside a tax base that is structurally incapable of paying for it. This structural imbalance keeps the economy in a state of stagnation for an indefinite future.
The EU’s adjusted outlook once again confirms that I am right. The EU Observer again:
For 2015, the outlook is also pessimistic: the EU economy is expected to grow by 1.5 percent (down from 2 percent predicted in spring) and the eurozone by 1.1 percent (compared to the spring forecast of 1.7 percent). EU “growth” commissioner Jyrki Katainen admitted that forecasts are difficult to trust, especially since all other international institutions publishing economic forecasts “have been more often wrong than right” because there are so many variables on growth, employment, and investments.
Oh dear, there is so much to factor in… Seriously – it is the job of the economist to separate what matters from what does not matter, and then make his forecasts for the former while not being distracted by the latter.
This kind of excuse would not pass for a serious contribution here in the United States. But the Europeans are also trying to blame their years-long, endless recession on new events. Another article in the EU Observer:
Germany is on the brink of recession after recording its weakest export levels for five years. Data published by the Federal Statistics Office on Thursday (9 October) indicated that exports slumped by 5.8 percent between July and August, the sharpest monthly fall since 2009, at the height of the financial crisis. Imports also fell by 1.3 percent, suggesting that German consumers are also losing faith in the country’s economy. In a statement, the statistics office blamed late-falling summer vacations in some German regions and the Ukraine crisis for the fall in exports and imports.
But of course, there is no problem with the high taxes in Germany, or the rising energy costs as they close their nuclear reactors and try to rely on windmills instead… As share of GDP, taxes in Germany have increased from 42.6 percent ten years ago to 44.5 percent in 2013. This places Germany 12th among the 28 EU member states, and just a hair below the 45.3-percent EU average. But being average does not cut it when times are tough, it is a buyer’s market and the consumers who can actually afford to buy things are far away from your own country’s borders.
And, as noted, exports no longer serve as the locomotive of the German economy. Berlin simply cannot continue to suppress domestic demand for budget-balancing and ill-conceived energy reform reasons.
Back to the story about Germany:
The dismal statistics are the latest sign that Germany is facing an economic slowdown. In August, the ZEW think-tank’s index of financial market confidence, a trusted indicator of German economic sentiment, hit its lowest level since December 2012. The fall was attributed to the weak eurozone and fears about the EU’s ongoing sanctions battle with Russia. According to Eurostat, the EU’s data office, Germany’s output fell by 0.2 percent between April and June, after expanding by 0.8 percent in the first three months of 2014.
So what is the prevailing advice for how to get out of this state of endless stagnation?
On Thursday, four of the country’s top economic institutes urged chancellor Angela Merkel to increase public spending in a bid to stoke the economic engine. “On the spending side, public spending should be increased in those areas which can potentially boost growth,” the IFO institute in Munich, DIW of Berlin, RWI of Essen and IWH of Halle said in a joint report.
How fortunate that four of Germany’s most prominent think tanks all agree with each other. One might wonder why they need four think tanks of they all agree on something so profoundly important as how to revive the economy. Not one of them expresses concern that Germany might need just a tiny bit more economic freedom. On that note, if they are going to expand government spending without running budget deficits – what is the point in taking money away from the private sector and dole it out again through government? Private-sector activity is going to be further depressed by higher taxes: either you take away from what they spend or you depress their cash-flow safety margins and force them to depress spending in order to restore those safety margins.
There are two reasons why Germany cannot grow without exports. The first is high taxes, which up until 2012 were higher than in Greece. The second is uncertainty about the future. German consumers and at least smaller entrepreneurs have adjusted their spending downward on a permanent basis, simply because they feel overall less confident and less optimistic about the future. As Keynes explained in Chapter 16 of his General Theory, a depression of economic confidence is not a temporary matter:
An act of individual saving means — so to speak — a decision not to have dinner to-day. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence or a year hence or to consume any specified thing at any specified date. Thus it depresses the business of preparing to-day’s dinner without stimulating the business of making ready for some future act of consumption. It is not a substitution of future consumption-demand for present consumption-demand, — it is a net diminution of such demand.
That downward adjustment in demand will become the new normal until consumers and entrepreneurs has a reason to become more optimistic about the future. Evidently, that is not happening in Germany.
Not in Greece either, by the way. From Euractiv:
Greece is “highly unlikely” to end its eurozone bailout programme without some new form of assistance that will require it to meet targets, a senior EU official said on Monday (3 November). “A completely clean exit is highly unlikely,” the official told reporters, on condition of anonymity. … The eurozone and IMF bailout support of €240 billion began in May 2010. Greece is in negotiation with EU institutions and the International Monetary Fund ahead of the expiry of its bailout package with the European Union on 31 December. … The official gave no details of what new aid might look like, but policymakers have said that the most likely tool is an Enhanced Conditions Credit Line, or ECCL, from the European Stability Mechanism. That means Greece would be under detailed surveillance from the European Commission, the EU executive, for the duration of the credit line. “There needs to be money available for drawing on,” the official said.
Money available for spending items that Greek taxpayers cannot afford. So long as those spending promises remain in place, Greece cannot regain its fiscal independence unless they massively raise taxes. That, in turn, would be like begging for an even deeper depression.
At least in the Greek case nobody is blaming the Klingon High Council for their bad economic situation. But unless the Europeans step up to the plate and take responsibility for their own economic failure, the entire continent will continue to dwell in the shadow realm between the economic wasteland and industrial poverty.
Yankees baseball legend Yogi Berra coined the proverbial phrase “It ain’t over ’til it’s over”. That is certainly true about the European economic crisis. This past week saw a crop of bad news from the Old World. Nothing very dramatic – and certainly nothing that should surprise regular readers of this blog – but nevertheless bad news. In this first of two parts, let’s look at a report from the EU Observer:
The eurozone appears to have come back onto the markets’ radar amid low inflation, poor economic news from Germany, and Greece’s bailout exit plans. Greece’s long-term borrowing costs went above 8 percent on Thursday (16 October) – their highest for almost a year – as investors took fright at the fragile political situation in the country. The government in Athens has tried to shore up popular support by suggesting it will exit its bailout programme with the International Monetary fund more than a year early.
There is an important background here. The bailout program had three components:
1. The Greek government will do everything in its power to combine a balanced budget with protecting as much as possible of its welfare state against the economic depression;
2. In return for the Greek government’s tax increases and spending cuts, the International Monetary Fund, the European Union and the European Central Bank provided loans that kept the Greek government afloat cash-wise;
3. The only metric used to measure the success of bailout policies is the stability of a balanced government budget.
If GDP did not grow, if unemployment was at 30 percent, if more than half the young in Greece had no job to go to… none of that mattered. As a result, there has been no structural improvement of the Greek economy; government has not reduced its burden on the private sector – quite the contrary, in fact. Welfare systems have been reduced, but higher taxes have prevented welfare recipients from transitioning into self sufficiency.
As a result, the social situation in Greece is almost unbearable. The political reaction has come in the form of a surge for parties on the extreme flanks of the political spectrum. In my book Industrial Poverty I explain in detail what happened in Greece, what brought the country down from the heights of European prosperity to permanent stagnation. Today, sadly, the country is little more than a macroeconomic wasteland.
It is with this in mind that one should approach the news that Greece is considering leaving the bailout program. The coalition government is under enormous pressure to save the nation itself, to keep parliamentary democracy in place and to inject some sort of life into the economy. If they fail either of two extreme political movements will take over – the Chavista communists in Syriza or the Nazis in Golden Dawn.
International investors know this and are understandably scared. In their mind the bailout is the least of available evils; in reality, as I explain in my book, the attempts at balancing the budget and saving the welfare state in the midst of the crisis are the very policies that keep Greece from recovering; weak signs of a minor recovery earlier this year have yet to materialize into anything other than the “beaten dog” syndrome often following protracted periods of austertiy.
This is the very reason why Greece is now considering leaving the bailout program. They cannot continue forever to try to muddle through with an economy deadlocked in depression and a democracy so fragile that it has brought the first Nazis into a parliament in Europe for the first time since World War II.
However, as the EU Observer explains, the Greek government is caught between a rock and a hard place – as are other hard-hit euro zone economies:
But the recent announcement spooked investors, unconvinced that Greece can stand alone. Long-term borrowing costs also jumped in the weak periphery states, Spain, Italy, and Portugal. The market jitters – while not comparable to the height of the eurozone crisis in 2011 and 2012 – come as the eurozone’s main economies are once again at odds over policy responses.
France also belongs on that list, primarily for its typically European attempt at leaving the bailout program. Its government tried to leave the bailout path for a left turn into the quagmire of government expansionism. Thinking that more government spending, on top of the largest government spending in the world, could in fact bring about a recovery, the French socialists who won the 2012 elections scoffed at the EU balanced-budget rules and went full speed ahead with their government-expansionist agenda.
Two years later that agenda has hit a brick wall. Massive tax increases, supposed to pay for some of the new government spending, have only resulted in an exodus of brain power and entrepreneurship. The French GDP is standing more still than the Eiffel Tower.
In fact, the EU Observer notes,
France and Italy are fighting a rearguard action for more flexibility saying budget slashing will condemn them to further low growth. Paris is on collision course with both Berlin and the European Commission after having indicated that it wants an extra two years to bring its budget deficit to below 3 percent of GDP. Italy, meanwhile, has submitted a national budget for 2015 which brings the country to the edge of breaking the rules.
The French challenge to the budget-balance rules compounds the uncertainty emanating from the talks in Athens about a Greek bailout exit. It is more than a theoretical possibility that at least one of these countries leaves the euro zone in the next two years, and does so for a combination of political and economic reasons. That would be an institutional change to the European economy – and really the global economy – of such proportions that no traditional quantitative analysis can render justice to a forecast of its effects. It is therefore entirely logical that global investors are growing more uncertain and as a result demand higher risk premiums.
As the icing on the uncertainty cake, informed investors know that Marine Le Pen may very well become France’s next president. If she wins in 2017 her first order of business is in all likelihood going to be to exit the euro zone and reintroduce the franc. On the one hand that could be an “orderly” exit; on the other hand it would have ripple effects throughout the southern rim of the euro zone to the point where the very future of the common currency is in grave danger.
In summary: mounting uncertainty about the future of the euro is being mixed with growing uncertainty about the macroeconomic performance of the member states of the currency union.
Stay tuned for the second part about the bad news out of Europe.
When government creates a spending program, it also makes a promise to taxpayers. So long as the sum total of those promises is small and government limited to protecting life, liberty and property, we have good reasons to believe that government can deliver on its promises. However, the more promises government makes, the fewer of those promises it will be able to keep. As government promises reach into income redistribution and services like health care, the distance between promise and provision grows into a chasm.
That chasm has opened up across Europe. As millions upon millions of Europeans have discovered, a broken government promise is not just a theoretical construct. It is harsh reality. First they were lured into dependency on government by lavish promises of being taken care of, then government walked away from its promises – and did so without offering people a route to an alternative.
The price is paid by the people. As government fails to deliver as promised, and taxes and regulations supporting the government monopoly all remain in place, people have nowhere else to go but down. A permanent blanket of stagnation slowly descends upon the economy and a new form of industrial poverty replaces prosperity and a bright future.
This is, again, not just theory. It is harsh reality. When government asks people to trust it, and then fails to provide that trust, even ebola can slip through the cracks of the crumbling tax-funded promises. A story from the New York Times offers a chilling example:
The case is particularly worrisome to health experts because Spain is a developed country that is considered to possess the kind of rigorous infection control measures that should prevent disease transmission in the hospital. Although the Ebola epidemic has killed hundreds of doctors and nurses in West Africa, health officials in Europe and the United States have reassured the public repeatedly that if the disease reached their shores, their health care systems would be able to treat patients safely, without endangering health workers or the public.
The story also suggests:
While the risk to hospital workers is thought to be far lower in developed countries, the infection of the Spanish nurse, along with the missteps in dealing with Ebola in Dallas, exposes weak spots in highly praised defense systems.
There is a major difference between the American and Spanish cases. In Dallas, health care workers approached the patient under the assumption that the U.S. government was right when, back in July, it assured Americans that there was no real risk that ebola would ever spread to the United States. Trusting their government, the health care professionals in Dallas used their professional skills as they have been trained, assuming that the people in charge of keeping our country safe were doing their job as promised.
Once the ebola case had been confirmed, however, our health care system, which still to a large degree is private and therefore has plenty of resources, went to work and contained what could have become a very serious outbreak.
Spain is a different case altogether. To begin with, the country has a virtually open border to northern Africa, with migrants coming daily across the narrowest stretch the Mediterranean. It is comparatively easy to travel from the epicenter of the ebola outbreak to the southern coast of Spain. But more importantly, the Spanish health care system, unlike the American, has suffered major spending cuts in the last few years. In December last year The Economist observed similarities between cuts in government health monopolies in Greece and Spain, with the Greek cuts leading to…
dramatic increases in HIV, mental illness, TB and the return of malaria. Greece made its cuts two years earlier than Spain did, so their impact became evident sooner. But the situation in Spain is just as worrying, warns Helena Legido-Quigley of the [London School of Hygiene and Tropical Medicine], who fears that if the government doesn’t change course soon, similar outbreaks could very well happen in Spain.
Specifically, The Economist notices, Spanish health care spending…
was reduced by 13.7% in 2012 and by 16.2% in 2013 (including social services). Some regions imposed additional cuts as high as 10%. As a result a significant part of the Spanish population is excluded from basic health care, which could in turn lead to public-health problems for the entire population.
As part of the 2012 cuts, the Spanish government reduced tax subsidies for medicine, a measure that was also used in Greece. The effect of these cuts is that many people simply do not get the medicine they have been prescribed – since there are no private alternatives, people are locked in to a defaulting government monopoly. Because of the high taxes needed to fund the welfare state, few Spanish families have enough money to pay privately for what they have already paid for through taxes.
With resources at hospitals being tightened, access to health care rationed and a culture of austerity spreading through the entire health care system, it is not out of the realm to ask to what extent Spain is at risk of an ebola outbreak because its government made a promise to its people that it cannot afford to keep. As an example, the New York Times story cited earlier reports that in order to treat one single ebola patient, a hospital in Madrid turned an entire floor into a sealed-off isolation unit. In a health care system with tight resources, that means the hospital has to move numerous other patients to other units or even other hospitals. This in turn means increasing the number of patients per room, or (as in Sweden) putting patients in storage rooms, lunch rooms, corridors or even patient lunch cafeterias.
In a private health care system, the supply of resources is dynamic. It depends on the public need for health care and is funded through a multiple of sources, such as insurance plans, out-of-pocket payments and charitable donations. Competition and patient choice guarantee that, over time, there is always provision of health care for all patients.
By contrast, in a government health monopoly resources are static and rigidly dependent on how much taxes the legislature can squeeze out of the private sector. If, in theory, health care were the only thing government provided, it may not be an unbearable burden to taxpayers. However, a single-payer government health monopoly is the crown jewel of the welfare state, and therefore adds up to an excessive tax bill for the private sector.
The effect is inevitably a long-time economic decline and the kind of welfare-state crisis that Spain is now experiencing. The pressing question now is: can a rationed government health monopoly protect a modern, industrialized nation from a deadly disease?
There is no better macroeconomic “health indicator” for an economy than private consumption. Not only is it the largest part of GDP, but private consumption also reflects well the overall sentiment of households. Since households are important spenders, taxpayers and workers all baked into one type of economic unit, the growth rate of private consumption is the best quick-check “wellness test” of an economy. (A more detailed understanding of the shape of an economy obviously requires a more detailed macroeconomic and microeconomic analysis.)
Since I have recently reported on how the European economic recovery has not materialized, I figured it would only be fair to perform a quick-check macroeconomic “wellness test”. Alas, I pulled private consumption data from Eurostat, and I made sure to get inflation-adjusted figures based on a price that is relatively distant in time. (If the index year is close in time there can be growth distortions based on the mere proximity to “year zero”.) I also selected quarterly data, which is not commonly used for this purpose. My motivation, though, is that if the quarterly data is not seasonally adjusted it allows for a more frequent communication of household sentiments.
You would expect this type of data to be available from every EU member state for every quarter you might want it. I often encounter that attitude from consumers of public policy research: somehow they assume that every piece of statistical information anyone could ever want is readily available within two clicks into the internet. That is not the case, though, and the reason is simple. Quality statistical material requires careful data collection, according to detailed and very rigid collection methods; it requires methodologically rigorous processing according to standards defined not just for this piece of information, but for every comparable piece of information in the world.
There are other methodological restrictions on statistical information that contribute to the production cost. We should actually take this as a sign of quality for the data we have access to; I always get suspicious when scholars claim to have produced large sets of quantitative information in short periods of time – it often leads to bombastic conclusions that later prove to be little more than a house of cards built on clay feet.
Anyway. Back to the European economy. For reasons of high quality standards and therefore reasonably high production costs for national accounts data, not every EU member state reports the kind of consumption data analyzed here. Figure 1 below reports real private consumption growth in 24 EU member states from 2002 through 2013:
The growth rates, again, are inflation-adjusted rates per quarter, over the same quarter the year before. This means that the blue line reports a rolling annual growth rate, updated quarterly. As such it helps us pinpoint business cycle swings with good accuracy. The most obvious example is that private consumption nosedives in the second quarter of 2008: after having averaged an acceptable two percent per year from 2003 through 2007, private consumption literally came to a standstill over the next five years. From 2008 through 2012 the average growth rate was zero percent.
The difference may not seem like much, but for two reasons it would be wrong to draw that conclusion. First, a one-percent reduction in private consumption equals a decline in spending worth a bit over two million jobs in the EU-28 economy. This does not mean that two million Europeans automatically lose their jobs if households cut spending by one percent – the economy is more dynamic than that. But it does mean that if private businesses lose sales over a sustained period of time they cannot afford to keep all of their employees. At the macroeconomic level this eventually translates into, roughly, two million jobs per one percent private consumption (measured in current prices).
In other words, even seemingly small fluctuations in household spending can have major effects on the economy.
Secondly, sluggish private consumption means that the economy is not evolving. If the growth rate falls below two percent, then at least in theory consumers are no longer improving their standard of living. I explain in detail how this works in my book Industrial Poverty (out August 28); a very brief explanation is that it takes a certain level of sustained spending to maintain one’s standard of living. As products get better and other factors affect the quality of our consumption, we have to grow our outlays by a certain minimum rate just to make sure we keep our standard of living intact.
For the first half of the 12 years reported in Figure 1, households in the 24 selected EU member states managed to maintain their standard of living; on the other hand, for the second half of the period they did not maintain that standard. With an average growth rate of zero (adjusted for inflation) the theoretical loss of standard of living was two percent per year.
In addition to creating unemployment, this protracted sluggishness in household spending is a long-term prosperity downgrade for Europe’s consumers. What is even worse is that there are still no signs of a return to higher growth rates. While 2013 saw an average .8 percent growth in the EU-24 we discuss here, that came on the heels of ytwo years of negative growth (-0.6 percent). There was a similar, and bigger, uptick in 2010 (1.5 percent) that proved to be an anomaly compared to the two years before and after.
Furthermore, data for the first quarter of 2014, which is available for 20 of the 24 EU member states, shows a rise in inflation-adjusted private consumption in three countries only. While it is good to see a rise in Greece and Spain, which have been the hardest hit by the crisis (Austria is the third) this is far too isolated and far too small to be the turnaround many economists have hoped for.
More importantly, this is where the use of quarterly data can spook the careless observer. Spanish private consumption, which is up by 3.1 percent in the first quarter of this year, has a pattern of growing every other quarter. Since it was down 1.3 percent in the last quarter of 2013, this only means that the economy is on track with its historic path (which, sadly, means zero growth over the 16 quarters in 2010-2013). The rise in Greek private spending is part of a similar pattern, coming on the heels of a 2010-2013 average of -1.1 percent.
Bottom line, then, is that European households are unwilling or, more likely, unable to unleash that spending spree the European economy needs so badly. This should not surprise any regular reader of this blog, but it will in all likelihood be a surprise to those who live in the illusion that big government and the welfare state are the blessings that prosperity is built from.
As the dust settles on the elections to the European Parliament, a somewhat schizophrenic conclusion is emerging:
- on the one hand voters expressed their skepticism toward the EU project and rejected, overall, the notion of a continuous, business-as-usual expansion of the EU into a new, gigantic government bureaucracy;
- on the other hand the rejection of even bigger government was partly expressed in a form that, absurdly enough, may very well pave the way for another, even uglier form of government expansion.
The outcome of the election is more dramatic than most media outlets have yet realized. Put bluntly, this election was a loss for European parliamentary democracy and a gain for authoritarianism of a kind Europe has not suffered from for a quarter century now. But as painful as it is to acknowledge, the real winners of this election were communists and aggressive nationalists - also known as fascists.
There is no mistaking the outcome: voters spoke, and numbers changed in the European Parliament. Political parties with a traditional commitment to parliamentary democracy lost dramatically, with conservatives and liberals losing more than one fifth of their seats. At the same time, communists and radical socialists of assorted flavors increased their parliamentary presence by one third.
Add to those gains the big inroads made by aggressive nationalists and fascists.
Europe’s political elite may want to ignore this, but the most dangerous reaction to this election would be to turn a blind eye to what voters did: they passed power out from the democratic center to the outer rim of the political spectrum. There, communists and fascists stood ready to scoop up voters who are deeply dissatisfied with, well, just about everything from unemployment and economic stagnation to immigration and “inequality”.
Europe is now at a fork in the road, one that will decide the fate of a continent that is home to half-a-billion people. But before we get there, let us take a look at what actually happened in the election.
Communist parties did well, especially in southern Europe where the Great Recession has done its biggest damage. In Greece, the radical leftist party Syriza, which sees Hugo Chavez’ Venezuela as a political role model, took 26 percent of the vote and became the largest Greek party in the EU Parliament. In Italy, incumbent prime minister Renzi’s leftist Democratic Party got 40 percent of the vote. Portugal’s old communist party, rebranded as socialists, came in first with 31.5 percent of the vote. In Spain, a radical socialist coalition took ten percent of the votes, placing them third in the election.
But it was not just in southern Europe that communists, old or new, did well. Ireland’s scary-left and historically terrorist-affiliated Sinn Fein got a frighteningly large 17 percent of the votes.
Sweden is an example of how refurbished communists have shown remarkable resiliency in the past two decades. Their radical left is split among three parties, which taken together is more than the country’s traditionally dominant social democrats got. The three radical leftist parties are: the Greens (15.3 percent of the vote), the renovated-communist Leftist Party (6.3) and the new, aggressively socialist Feminist Initiative (5.3).
Altogether, the entire leftist spectrum – from vanilla-favored social democrats to hardline Chavista leftists – held their lines in the European Parliament, in the face of stiff competition. But as indicated by the above mentioned examples, the radical flank within the leftist block made big advancements. Their European Parliament group, called GUE/NGL, increased its number of seats by one third. This number could increase even more when some small, new parties from across the EU choose affiliation.
The underlying message in the shift toward the hard left is that Europe’s voters – already living under the biggest governments in the free world - have forgotten what happens when government grows beyond the boundaries traditionally respected in Western Europe. Perhaps the most conspicuous signal of Europe’s communist amnesia is embedded in the seven percent voter share that Die Linke got in Germany. They are the old Socialist Unity Party, in other words the party that ruled East Germany with an iron fist and back-up from Soviet tanks throughout the Cold War. Die Linke is fiercely anti-capitalist and shares Syriza’s adoration for what Hugo Chavez did to Venezuela.
The fact that Die Linke only got 7.4 percent should be considered in the context of the fact that Germany’s Green Party captured 10.7 percent of the votes. This puts the radical left in Germany at 18.1 percent, a share that grows even more in view of the fact that the SPD, the social democrats, are now parked at a lowly 27 percent voter share. If the social democrats in Germany continue to decline, the combined voter share of the Green Party and the old East German communists could easily exceed 25 percent in the next German national elections.
A surging radical left in the European Parliament will have profound consequences for European politics, but it will also affect Europe’s relations to the United States. More on that in a moment. First, let us take a look at the other flank of the authoritarian lowland.
Known under its less sophisticated label “fascism”, authoritarian nationalists made frightening advancements in the election. Most notorious, of course, is the victory in France for Front National under Marine Le Pen’s stewardship. Her polished version of the party her father founded won a stunning 25.4 percent of the vote, putting them decisively ahead of the nearest competition.
Ten years ago, Front National was little more than a punch line in a political joke. Yes, Jean-Marie Le Pen technically came in second in a presidential run-off against incumbent Jacques Chirac, but the entire campaign was of the same kind as if the Democrats had put up Ralph Nader against George W Bush in 2004. (No other comparison intended between Nader and Le Pen, of course.) Today, Front National is at a point where their leader can confidently demand that President Hollande dissolve the national parliament for new elections. That is not going to happen, but the demand sent shivers through the French political establishment.
It should. Marine Le Pen is no longer just a French political contender – she is in fact not just the leader of what is currently the largest political party in France. She is emerging as the leader of a new, bold, aggressive nationalist movement in Europe. Her party group in the European Parliament will incorporate outspoken fascists such as Hungarian Jobbik (which came in second in Hungary and apparently has its own uniformed party corps). Some media reports state that Front National and Jobbik are already in talks with each other on how to cooperate in the European Parliament.
Another of Le Pen’s new friends is Golden Dawn, which in the European election confirmed its position as Greece’s third largest party. Despite extensive legal challenges and elected officials of the party currently being incarcerated, Golden Dawn refuses to go away. More than likely, their strong support among police and the military will be enough to let them return, emboldened and empowered, to both the Greek and the European political scene.
With Front National, Jobbik and Golden Dawn as their pillars, the aggressive nationalist party group in the European Parliament could indeed turn out to be a vehicle for the rebirth of European fascism. The deciding factor will be where Europe’s rapidly rising patriotic parties will land. This is a different breed than the aggressive nationalists, consisting of Euro-skeptic parties, best exemplified by Britain’s UKIP. There is now a whole range of parties in Europe that fall into this category, such as PVV in the Netherlands, Danish People’s Party, Swedish Democrats, True Finns, Alternative for Germany and Austria’s People’s Party.
Some of these parties did remarkably well: both UKIP and the Danish People’s Party won their countries’ respective European Parliament elections. The Swedish Democrats scored almost ten percent of the votes, double what they got in the national elections in 2010. Alternative for Germany surprised many by capturing as much as seven percent of the votes, while there was disappointment among PVV supporters in the Netherlands as their party only got 13 percent and a third place.
It is not an exaggeration to say that this new group of patriotic parties holds Europe’s fate in their hands. Their ideological foundation spans from “basically libertarian” as Nigel Farage once called UKIP to welfare-statist Swedish Democrats. But they all have in common that they are committed to traditional, European parliamentary principles. This sets them apart from the aggressive nationalists whose political visions do not exclude a new full-scale fascist experiment.
If some of the patriotic parties are lured into cooperation with Front National, Jobbik and Syriza, there is a significant risk that Europe, within the next five years, will see a continent-wide fascist movement. There are other aggressive nationalist parties lurking in the political backwoods, ready to capitalize on voter disgruntlement with existing political options. Among those, Germany’s National Democratic Party, NDP, actually captured on seat in the European Parliament this time around.
With the history of Front National in mind, only imagination sets boundaries to what the NPD can accomplish.
Another example is the Party of the Swedes. Originally called the National Socialist Front and merged with violence-prone Swedish Resistance Movement, the Party of the Swedes is waiting for the patriotic, parliamentarian Swedish Democrats to fail to deliver on their voters’ Euro-skepticism. While waiting, Party of the Swedes is gaining parliamentary skills at the local level around Sweden. That experience can then be used in a run for national office – and eventually to reach for the European Parliament.
While fundamentally anti-democratic movements gained ground, the surge of democratic, patriotic parties is the only silver lining in this European Parliament election. This group is still small compared to the traditional center-right parties known under their acronyms EPP (center-right) and ALDE (center-liberal). But these democratic, patriotic parties hold the map in their hands to Europe’s future. If the EPP and ALDE choose to cooperate with them, then Europe will choose the stable, democratic road to the future.
If, on the other hand, the Europhiles in EPP and ALDE continue to ignore the growing, sound, democratic version of Euro-skepticism, and instead charge ahead with their project of a grand European Super-Union, the voter reaction will be fierce and potentially catastrophic. At that point, voters will seek other, much less palatable outlets for their skepticism or outright resistance to the European project.
If leaders of Europe’s conservatives, liberals and social democrats do not pay attention to what actually happened in this European election, they will do Golden Dawn, Jobbik, NPD and Front National a service they will regret for the rest of their lives.
It does not matter if Marine Le Pen is a fascist or an aggressive nationalist. Her surge to pan-European prominence has uncorked a bottle where black-shirted genies have been locked away for decades. History has shown how relentlessly those genies can intoxicate cadres of voters and how viciously they can tear down the institutions of parliamentary democracy.
Europe is playing with fire. The only thing that stands between the torch of fascism, lit up in this election, and a pan-European bonfire is the skill and insightfulness of a small group of Europhile politicians and bureaucrats in the hallways of power in Brussels. So far the leaders of EPP and ALDE, as well as the European Commission, have thoroughly ignored the rise of Euro-skepticism around the continent. So far they have been completely tone deaf to widespread popular frustration with the EU project.
Hopefully, they will come around and start listening to their critics. Hopefully they will let Nigel Farage be the recognized voice of Euro-criticism. But time is running out. If nothing decisively happens soon, the same trend that was set in this election will begin to show up in national elections.
In 2017, the Palais de l’Elysee could have a new tenant - Marine Le Pen.
And when times got tough, there was just about enough
But we saw it through without complaining
For deep inside was a burning pride
In the town I loved so well
The current economic crisis in Europe is not the first. Mankind has experienced good and bad economic times for as long as organized economic activity has been around. If we had the proper documentation we could probably study business cycles as far back in time as ten thousand years. While we cannot say for certain how people far back in history handled economic recessions and depressions, we do know from recent history (the past few hundred years) that we as a civilized, intelligent species are able to go through tough times without resorting to revolutionary measures.
Yet today, when Western Civilization is supposed to be at the very height of its sophistication, the gut reaction from people living under serious economic conditions seems to be to embrace political extremism. The emerging results from the local elections in Greece is a case in point. From the EU Observer:
The radical-left Syriza party is ahead in the first round of voting in Greek local elections on Sunday (18 May), while exit polls suggest a boost for the neo-Nazi Golden Dawn in some areas. Syriza is set to take Athens and the surrounding Attica region away from the ruling coalition of the conservative New Democracy and its socialist partner, Pasok.
Syriza is ideologically affiliated with the Venezuelan socialist party. Their ideal economic system is Chavista socialism, with widespread government ownership, radical redistribution measures, and both fiscal and monetary policy that completely ignore the laws of economics. Their ambitions do not stop at simply restoring the (failed) European welfare state – they want to make Greece the first European country to limp along in the left footsteps of Hugo Chavez.
The fact that they make progress in the Greek elections is troubling, but hardly surprising. They have made steady advancements in Greek elections for the past couple of years. Together with other radical leftist parties in Europe they are likely going to gain significantly in the European Parliament elections later this month.
Equally troubling is the fact that Greek voters also allowed the openly Nazi Golden Dawn to advance. They are the first Nazis to set foot in a European parliament since the 1930s, they have made a name for themselves as openly racist and nationalist, and they want to socialize large sectors of the Greek economy. On top of that, they are part of a growing radically nationalist movement across Europe, one that has not yet gained the same momentum as the Communist surge that Syriza is part of. However, it is only a matter of time before the two are equally powerful – and equally threatening to Europe’s future political stability.
Again, the gasoline that is fueling that rise of totalitarianism in Europe is – yes – the ongoing economic crisis. Back to the EU Observer article:
Prime Minister Antonis Samaras’ conservative-led coalition came to power two years ago to steer Greece out of its debt-ridden crisis. But austerity measures imposed by the troika of international creditors on Greece, and then implemented by Samaras, led to rocketing unemployment and a 40 percent drop in purchasing power since the start of the crisis four years ago. Jobless rates published earlier last month show more Greeks are out of work compared to last year.
As I noted back in April, the Greek economic crisis is stabilizing, not going away. This, again, explains why extremism is on the march in Greece – instead of “seeing it through” and relying on “a burning pride” to carry the day, Greek voters rush to those who promise revolutionary solutions. The EU Observer again:
The Wall Street Journal reports it will be the first time in almost 40 years that a [center-right] New Democracy candidate will not be in the second [election] round in Athens. … In a further blow to Prime Minister Samaras, the Guardian newspaper reports neo-Nazi Golden Dawn candidate for Athens’ mayor could come in third with 15.5 percent of the votes. Their candidate for prefect in Attica obtained around 10 percent of the votes. Despite being under investigation for its criminal activities, Golden Dawn attracts voters because it is seen as reaching out to those most affected by the crisis. “Everyone I know is voting for Golden Dawn because they are starving and jobless,” a Greek voter told the Guardian.
Greece is the most extreme example in Europe, but it is far from the only case of dangerous political radicalization. Again, keep a watchful eye on the European Parliamentary elections, which take place in the window of May 22 – May 25. As current opinion polls show, there is a clear risk that totalitarian nationalists (not to be confused with libertarian-leaning patriots like UKIP in Britain) and equally totalitarian communists (not to be confused with traditional European social democrats) will be the biggest winners. That would be thoroughly bad for Europe, and the repercussions should echo all the way into the State Department in Washington, DC.
Never bark at the Big Dog. The Big Dog is always right.
As expected, the harsh reality of the European economy is beginning to sink in with the political leaders of the EU. For a while, the narrative has been that the European economy is rebounding and that unemployment is falling. I have maintained all along that there are no signs of any such recovery, and on Friday Eurostat released a report that begins to backtrack from the unwarranted optimism. However, as the EU Observer reports, the narrative has changed somewhat, now putting focus on differences between member states rather than the absence of any downward trend across the EU:
Figures released on Friday (2 May) by the EU’s statistical office, Eurostat, indicate large differences remain in unemployment rates across member states. The eurozone unemployment rate was 11.8% in March 2014, stable since December 2013, but down from 12.0% in March 2013 With an 11.8 percent overall jobless rate in the eurozone, the chances of people landing a job remain low in countries like Greece and Spain when compared to Austria and Germany. At 26.7 percent, austerity-hit Greece still has the worst unemployment rate in the EU, followed closely by Spain with 25.3 percent. Austria at 4.9 percent and Germany at 5.1 percent have the lowest.
There is a good reason why the new story in Europe is about differences between member states rather than the overall trend. Figure 1 reports quarterly data on total unemployment, not seasonally adjusted, for the EU as a whole and for the euro zone specifically:
Yes, there are differences between member states, but the differences become pointless of there is no overall positive trend in unemployment. Germany is a good example, with an unemployment rate at 5.5 percent in the first quarter of 2014. While this is low by European standards, it is important to note that there is no strong downward trend in these numbers. Yes, measured over the same quarter a year before (e.g., first quarter of 2014 compared to first quarter of 2013) the Germans do see a slow, weak but nevertheless visible improvement. However, the rate still fluctuates from quarter to quarter by as much as a half percentage point, showing somewhat of a weakness in the trend.
Figure 2 highlights further the lack of trend in unemployment:
Most notably, Greece and Italy have not yet reported full data for the first quarter of this year. So far their trends point steady upward, though numbers that I reported previously on the Greek GDP give us reason to believe that unemployment will be flat in early 2014. Italy is a more uncertain case, partly due to growing talks about the country leaving the euro.
It is positive, no doubt, that both Spain and Ireland saw a decline in unemployment in the first quarter of 2014 (the second quarter in a row for Ireland with a decline). However, at the same time French unemployment is steadily on the rise, a fact that, given the size of the French economy, will have hampering effects on any possible recovery in other euro-area countries.
As we return to the EU Observer story, we can hear the frustration echo through the EU head quarters:
EU social affairs commissioner Laszlo Andor called for more investment into job creation. “The ultimate factor that will determine Europe’s economic future is whether we can hold together and further strengthen our Economic and Monetary Union, or whether we let weaker members of the EU and of our societies drift away,” he said. Earlier this year, Andor warned that one in four Europeans is at risk of poverty, despite unemployment figures dropping in some member states. Young people are the worst affected by the unemployment crisis. Only around one in four people of working age under 25 have a job. To offset the trend, the EU last summer launched its Youth Guarantee scheme with a promise to help the young find jobs, continue their education, or land a traineeship within four months of becoming unemployed or leaving formal education. EU money to support the scheme is primarily sourced from the European Social Fund (ESF).
Which is built by, and maintained by, Europe’s taxpayers. Instead of doing something about the high taxes and other factors that prevent Europe’s entrepreneurs from creating jobs, the EU taxes people more so it can give money to the young men and women who cannot get jobs because of the high taxes.
Of course, as the EU Observer story continues, spending taxpayers’ money to create jobs is about as hopeless a project as trying to ride a bicycle in zero gravity:
But given the scale of the problem, the EU plan has been criticised for being underfunded and lacking in ambition. The Brussels-based European Youth Forum in a study out in April on ten member states says the scheme has yet to live up to its promises. “It is a good way of tackling youth unemployment but effectively so far there hasn’t been enough ambition in it and enough political will in some member states to implement it properly,” said a European Youth Forum spokesperson.
Wrong. The reason why it has not yet been successful is because it is a government program, spending taxpayers’ money when taxpayers should really be allowed to keep their money and spend it as they see fit. Because of the high taxes across Europe, only countries with strong exports industries are able to pull ahead (Germany and Austria are good examples). Until government rolls back its presence in the economy – on both the spending side and the taxation side – Europe will be stuck with its disastrously high unemployment levels. Temporary changes up or down will not make any difference over time.